Impact of the Russian-Ukrainian war on agriculture and energy sectors

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Attendant Denesyia Maharaj pumps gas for a customer at a Unipet gas station in San Fernando. – AYANNA KINSALE

GEOLOGICAL SOCIETY

As of this writing, the Russian-Ukrainian conflict is entering its seventh week.

It is a major humanitarian crisis, with more than 40,000 Ukrainians dead so far, and the invasion triggering the biggest refugee crisis in Europe since World War II.

More than 4.7 million Ukrainians have left the country and a quarter of the population has been displaced.

The conflict also has far-reaching global economic consequences in many sectors, as Ukraine and Russia are major global producers of several raw materials.

We will review some of these sectors in relation to the economy of Trinidad and Tobago.

Agricultural sector

Ukraine is a world leader in terms of agricultural exports. It produces 18% of world exports of sunflower, safflower and cottonseed oil; 13 percent of maize production; 12% of world barley exports; and eight percent wheat and meslin.

It is such an important contributor to food security across Europe that it is commonly referred to as its ‘breadbasket’.

The only European country to rival Ukraine in the production of crops like wheat, corn and sunflower is Russia. As such, the ongoing invasion of Ukraine poses a serious threat to the vital stable food supply on which much of the world depends.

The shortages created by the sudden and significant removal of these agricultural products from the supply chain have led and will continue to lead to inflationary pressures on the prices of these products. As countries strive to restore food security with an already limited supply of global agricultural products, supplies will flow to countries willing and able to pay higher prices.

Here in Trinidad and Tobago, we will no doubt feel the effects of these shortages and price increases when we visit grocery stores and food establishments. Flour products and cooking oil are an integral part of our culinary offerings. So, in the event of a protracted conflict, we can expect limited supplies on our grocery shelves and paying more at food stalls and restaurants for our beloved groceries.

Energy sector

In addition to being both Russia and Ukraine major producers of agricultural commodities, Russia and, to a lesser extent, Ukraine are major producers of oil and gas.

Russia is the third largest oil producer after the United States (U.S.) and Saudi Arabia with 10 million barrels per day, but it is the world’s largest exporter of oil and petroleum products, data shows. of the International Energy Agency (IEA). Russia is the world’s second largest producer of natural gas, behind the United States, and has the largest gas reserves in the world. Russia is the largest gas exporter in the world. In 2021, the country produced 762 billion m3 of natural gas and exported around 210 billion m3 by pipeline.

Farmer Serhiy, a grain producer, shows a crater left by a Russian shell on his field in the village of Ptyche, eastern Donetsk region, Ukraine. -AP Photo

Europe is particularly dependent on Russian gas, which provides 40% of its natural gas imports. Germany and Italy are particularly vulnerable to supplies from Russia, as they obtain most of their natural gas through pipeline networks fueled by Russian gas.

Ukraine has a centuries-old history of oil and gas production and has significant reserves of conventional and unconventional hydrocarbons, estimated at nine billion tonnes of oil equivalent (Btoe). Natural gas reserves are estimated at 5.4 trillion cubic meters (tcm), with proven reserves of 1.1 tcm of natural gas, over 400 million tonnes (Mt) of gas condensates and 850 Mt of reserves of oil.

In response to the invasion, the United States and other European countries imposed varying levels of sanctions on different sectors of the Russian economy.

The United States imposed an outright ban on Russian exports and also cooperated with European countries to impose various financial sanctions. As we have seen over the past few weeks, any conflict in this region will undoubtedly put upward pressure on oil and gas prices.

The invasion has not yet resulted in a loss of oil supply to the market. Prices nonetheless jumped US$8 a barrel to US$105 a barrel on news of expectations that sanctions on Russia would cripple energy exports.

It is currently unclear what impact the sanctions will have on energy flows and how long any supply losses will last.

Any analysis of the oil and gas industry should not be taken in isolation, as the world is still normalizing after two years of varying levels of global shutdowns resulting from the covid19 pandemic.

A sudden loss of demand with oversupply would have destabilized production levels and industry maintenance schedules. We cannot forget when there was a flash crash in oil prices on April 20, 2020 and prices entered negative territory.

However, as the effects of the pandemic subsided and countries began to reopen their economies, demand for energy surged and put upward pressure on prices. Fortunately, the energy industry was already responding to this demand stimulus by looking for ways to increase supply months before the conflict.

This would have resulted in some stability in the industry and prices would not rise permanently in the weeks following the start of the dispute as there was spare capacity to absorb its effects.

A high-priced energy environment would stimulate capital inflows into the hydrocarbon and renewable energy sectors. Many oil and gas reserves that were previously unprofitable to produce in a low price environment could now be exploited, especially if there is an estimate of a future increase in demand.

High energy prices are also encouraging a move towards renewable energy research and development. While oil and gas will remain the main source of energy for the foreseeable future, global episodes like the covid19 pandemic and this conflict strengthen the case for alternative energy sources and increased energy security.

In TT, we have seen an increase in the prices paid at the pump for transport fuels. Gasoline (premium and premium) has been increased by 18% and 20% respectively. Diesel has been increased by 15%. However, the kerosene has been increased by 133%.

With the steady rise in oil prices over the past few months, it has become difficult to maintain pump prices at current levels as we import our fuels. These increases, as argued by the Minister of Finance, became necessary because with the previous price structure, the government would have subsidized transportation fuels to the tune of $2 billion for 2022, this expenditure coming from tax revenues .

These pump price increases would reduce the subsidy to $840 million in 2022.

While it can be debated that we here at TT paid a relatively low price for our transport fuels and there was room for an increase compared to our Caribbean neighbours, we cannot not consider the sector in isolation.

Transport plays an important role in the production of each good and in the implementation of each service. Salary levels and the level of inflation and employment must also be taken into account.

In an environment characterized by relatively static wages and rising levels of inflation and unemployment, any increase in transportation fuels will cause some level of economic hardship. We can expect increases in price levels, as well as some level of economic stagnation due to reduced disposable income of citizens.

As the Russian-Ukrainian conflict drags on, the loss of life and the humanitarian crisis it is creating are very worrying. However, here at TT, we will feel the effects every time we visit local grocery stores or restaurants or fill up the gas tanks of our vehicles.

There are also other sectors that will be affected globally, such as precious metals and financials. It is in everyone’s interest that this conflict be bought to a peaceful resolution in the near future.

This article was originally published in the GSTT Hammer (https://thegstt.org/publications/hammer) in May 2022. Steve Seetahal is a senior instructor at UTT in Mathematics and Entrepreneurship. He has a master’s degree in energy economics from UT Austin, an MBA from Harvard Business School, is a former Fulbright scholar in economics, and a former trustee of the Central Bank of TT.

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